India-focused exchange-traded funds (ETFs) listed abroad are increasingly influencing the direction of the local stock market. In the last one month when foreign institutional investors dumped Indian equities, ETFs alone accounted for about 30% of it.
Still, ETFs? influence on Indian markets is not as much as in other emerging markets such as Taiwan (71%), South Korea (51%), Russia (44%) or Brazil (35%). Growing India-focussed ETF assets as well as new filings in US indicate that their influence is going to grow from hereon.
?ETFs are increasingly influencing index stocks creating gaps in valuations between large-caps and mid-caps over the short term,? says Apoorva Shah, EVP & senior fund manager at DSP BlackRock Mutual Fund. This, he explains, has made fund management much more challenging for long-term investors. Normally, structured ETFs are benchmarked to Nifty and any instances of risk aversion among ETF investors leads to pressure on Nifty stocks than otherwise.
As of today, India-focussed ETFs have about $2.4 billion of assets under management with Wisdom Tree India earnings fund, iPath MSCI India Index ETN, PowerShares India portfolio and iShares S&P India Nifty 50 Index Fund among the top.
However, the ambit of ETFs is much wider. These funds invest in Indian markets based on their specific portfolio allocation to the country. According to a recent report by Kotak Institutional Equities, in recent times, eight out of the 10 largest outflows in the emerging markets have been made by exchange-traded funds.
Recently, eight new India-focused ETF filings have been made with US regulatory authorities by Emerging Global Advisors for its launch, while Direxion has filed for nine.
?Going by the number of filings of India-specific ETFs in US, there should be some launches in the near future,? said Naveen Kumar, MD of Indxx Capital, an index provider, which devised the Indxx India Consumer Index launched by EGSHARES last month on NYSE.
Interestingly, he mentions that most of the Indian ETFs are not structured to just mimic popular benchmark indices like Nifty. The structure of ETFs has moved to include style-based indices such as leveraged ETFs or inverse ETFs. While the former invests in the derivative market by taking leveraged positions, inverse ETFs try to achieve the opposite of the index movement.
Globally, ETFs have turned popular with their assets lagging behind only that of hedge funds with assets under management of about $1 trillion dollar.
According to market participants, India-focussed ETF investors include both retail investors as well as institutions in equal proportions. Institutional investors include fund of funds, hedge funds and pension funds. Hedge funds use ETFs for short strategies. It is also believed that pension funds are increasingly use ETFs as a transition management tool to ‘equitise’ cash they were holding until they could invest the assets in a new asset class.